Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Has AsiaInfo-Linkage Become the Perfect Stock?

Finding companies that have all the right stuff can produce winners.

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether AsiaInfo-Linkage(Nasdaq: ASIA) fits the bill.

The quest for perfectionStocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.

Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.

Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.

Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.

Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at AsiaInfo-Linkage.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

33.2%

Pass

1-Year Revenue Growth > 12%

9.8%

Fail

Margins

Gross Margin > 35%

40.7%

Pass

Net Margin > 15%

7.3%

Fail

Balance Sheet

Debt to Equity < 50%

0.6%

Pass

Current Ratio > 1.3

2.63

Pass

Opportunities

Return on Equity > 15%

3.5%

Fail

Valuation

Normalized P/E < 20

36.06

Fail

Dividends

Current Yield > 2%

0.0%

Fail

5-Year Dividend Growth > 10%

0.0%

Fail

Total Score

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at AsiaInfo-Linkage last year, the company lost 3 full points. A big slowdown in sales growth and plunging margins didn't help the telecom IT provider's score, even though the stock has been able to hang on to gains it earned earlier this year.

As a small Chinese company, AsiaInfo has had to deal with the same investor concerns about fraud that have plagued many of its compatriots. Yet with its close relationship with telecom giant China Mobile(NYSE: CHL), as well as strong ties to China Mobile rivals China Unicom(NYSE: CHU) and China Telecom, AsiaInfo doesn't really look like the companies that have seen fraud allegations stick.

Still, AsiaInfo has had to deal with tough times. This time last year, AsiaInfo said its future results would fall short of expectations, although some of those concerns didn't pan out as much as investors feared.

For AsiaInfo to improve, it needs to start venturing outside its comfort zone and challenge competitors Comverse Technology(Nasdaq: CMVT) and Convergys(NYSE: CVG) on the international front. Moving beyond China may be AsiaInfo's best chance to grow, absent a successful takeover bid.

Keep searchingNo stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Add AsiaInfo-Linkage toMy Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of China Mobile. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
Follow @DanCaplinger